Anthony Michael, Head of Fixed Income - Asia Pacific at Aberdeen Asset Management, comments:
"Recognition by credit rating agencies that Indonesia is an investment grade country is long overdue. The authorities have managed the economy well and the country's debt to GDP is likely to fall to below 25% in 2012.
"Our Asian fixed income portfolios are overweight Indonesian bonds (both external and local currency denominated) and the Indonesian rupiah. We are particularly encouraged by the administration's formidable efforts to promote much needed infrastructure investment and, importantly, reducing obstacles to and actively encouraging foreign direct investment. These are acknowledged by Moody's and reinforce our optimism for investments in Indonesia. FDI flows are already strong, US$13bn in 2011 as foreign capital is increasingly attracted into the economy. This has not just been focussing on its commodity sector, but increasingly in manufacturing as well, which is benefitting from the tremendous amount of wealth creation taking place and burgeoning domestic demand. In previous years the market has noted an outflow of domestic capital to offshore centres such as Singapore, but from mid-2010, the country's robust economic prospects has been attracting these domestic flows back into the country, and is one of the strongest indicators of the confidence in Indonesia's prospects. The government routinely underspends, generating fiscal deficits of only around 0.5-1.5% of GDP, providing considerable fiscal flexibility and scope for investment, particularly in infrastructure. And growth has been very firm, even in the current climate, running at around 6-6.5%.
"Indonesia's robust health and that of other sovereign names in the region is in stark contrast to the financial situation many countries in Europe find themselves in. The deterioration in developed world sovereign finances requires fixed income investors to re-think their structural allocations to Emerging Market sovereigns in general and to Asian Fixed income in particular. In our view global investors continue to remain underweight the Asian region's fixed income markets and despite recent volatility, particularly in the local currency sovereign markets, Asia's positive longer term structural fundamentals should continue to support positive risk adjusted returns over the medium term."
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